It was only two years ago that many high-yield checking accounts were paying 5.5 percent or even 6 percent annual percentage yield. Now, those yields have dropped to a range in the high 2s to the low 4s, thanks to the stagnant low-yield interest rate environment, says Gabriel Krajicek, CEO at BancVue, the Austin, Texas, company that invented REWARDChecking, a high-yield product used by many community banks and credit unions.

Checking and savings toolbox

Banks make money by turning deposits into loans and capturing the difference, or the spread, between the rates they pay for deposits versus the rates they charge on loans. Consumer demand for these checking accounts has boomed as deposit yields elsewhere have evaporated. But loan demand has dropped off in some areas either because budget-conscious customers don’t want to increase their debt load, or because they’re not meeting loan qualifications. That disparity is forcing some bankers to trim more than just the yield on their high-yield checking accounts.

Larry Daniel, director of retail banking at First Arkansas Bank & Trust, says the bank reduced the interest rate on its checking account from 4.35 percent to 3.45 percent, effective in the November 2009 statement cycle, on balances up to $50,000. Balances above $50,000 will receive 0.5 percent, down from 1.75 percent. As of the December 2009 statement cycle, the maximum balance to receive the high rate drops to $35,000.

Additionally, First Arkansas has had to restrict the account, which originally was available nationwide, to Arkansas residents.

Borrowers pulling back

“This product has exceeded our wildest expectations,” says Daniel. “We’re up to almost $141 million in (the accounts). It’s a concentration issue, a rate issue and a loan issue — almost a perfect storm from an economic standpoint. We have surplus funds that we’re paying a very, very attractive rate on, but we’re having difficulty finding people who want to borrow.

“Everybody’s saying the banks aren’t making loans. We’re looking for people to make loans to, and they’re just not out there. I think the public has pulled back quite a bit. We’ve always been a conservative lender so it’s not that we’ve changed our criterion, but the consumer is being more cautious. So now we have excess funds and nowhere to invest them, so with an eye on safety and soundness we decided to wind it down a bit.”

BancVue’s Krajicek says he’s seeing this lack of loan demand “geographically splattered” across the country.

“I don’t know if it’s true with the bigger banks because we focus on community financial institutions. But every month we have 30 or 40 bank professionals come into our offices for a conference and the most common thing I’m hearing is that the demand for loans is down, it’s not the other way around.

“If the loan-to-deposit ratio starts to go south, we counsel (our clients) to pull back, not go nationwide, for example, or to drop their rate slightly, or lower the cap in the tiered interest rate structure.”

Some banks can offer higher yield

But some banks, which may be in areas with better loan demand, have been able to continue offering high-yield checking to a broader customer base, in part because of the structure of the account.

Most high-yield checking products offered by community banks and credit unions require customers to use their debit cards for 10 to 15 transactions per month, not counting ATM usage. That debit card usage generates fee income for the bank. Other fee-generating or money-saving requirements include having one direct-deposit or automatic bill payment per month, and agreeing to receive statements online.

“The effective cost of funds goes down substantially if you factor in the debit card usage and the electronic statements,” says Bill Skow, executive vice president at State Bank of Toledo in Toledo, Iowa, which has reduced its high-yield checking rate to 2.51 percent, but continues to offer the account nationwide and pays that rate on balances up to $70,000.

“That $2.51 actually looks more like 1.5 percent or 1.75 percent to us,” says Skow.

Skow says a lot of customers who opened accounts on the Internet closed their accounts as the rate, which was 6.01 percent at one time, dropped.

“We knew there was that potential,” he says. “It really doesn’t bother us. We have the account structured to where we think it’s going to be a good account for us no matter what the rate. We’re going to try to move it with the market, so that it’s always what we would consider to be a very fair, aggressive rate.”

While BancVue’s product is probably the most prevalent high-yield checking account nationwide, a number of banks, which you can find on the Internet, have developed their own high-yield checking accounts.

If you’re also interested in decent yields without the debit card requirements, peruse Bankrate’s high-yield savings accounts index or, if a fixed rate is more appealing to you, search Bankrate’s high-yield CDs.

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